Life Insurance

Life Insurance Basics

Many financial experts consider life insurance to be the cornerstone of sound financial planning. It can be an important tool in the following situations:

1. Replace Income for Dependents

If people depend on an individual’s income, life insurance can replace that income if the person dies. The most common example of this is parents with young children. Insurance to replace income can be especially useful if the government- or employer-sponsored benefits of the surviving spouse or domestic partner will be reduced after he or she dies.

2. Pay Final Expenses

Life insurance can pay funeral and burial costs, probate and other estate administration costs, debts and medical expenses not covered by health insurance.

3. Create an Inheritance for Heirs

Even those with no other assets to pass on can create an inheritance by buying a life insurance policy and naming their heirs as beneficiaries.

4. Pay Federal “Death” Taxes and State “Death” Taxes

Life insurance benefits can pay for estate taxes so that heirs will not have to liquidate other assets or take a smaller inheritance. Changes in the federal “death” tax rules through January 1, 2011, will likely lessen the impact of this tax on some people, but some states are offsetting those federal decreases with increases in their state-level estate taxes.

5. Make Significant Charitable Contributions

By making a charity the beneficiary of their life insurance policies, individuals can make a much larger contribution than if they donated the cash equivalent of the policy’s premiums.

6. Create a Source of Savings

Some types of life insurance create a cash value that, if not paid out as a death benefit, can be borrowed or withdrawn on the owner’s request. Since most people make paying their life insurance policy premiums a high priority, buying a cash-value type policy can create a kind of “forced” savings plan. Furthermore, the interest credited is tax deferred (and tax exempt if the money is paid as a death claim).